STRENGTHS

Substantial reserves of gas and oil (second and fourth in the world respectively)

Very low external debt

Strategic position in the sub-region

WEAKNESSES

Sanctions broadly maintained by the UN, the United States and the EU because of the Iranian nuclear programme

High inflation

Social tensions

Unfavourable business climate

Risk assessment

Recovery expected after the lifting of sanctions

After a slowdown in 2015, the lifting of sanctions following the entry into force of the Joint Comprehensive Plan of Action (JCPOA) in January 2016 should lead to an economic recovery notably trough a rebound of exports. Iran’s return to the global market will mainly benefit to oil exports. UE embargo has significantly hindered Iranian’s oil production, estimated at 3 Mb/d in 2015. According to the IAE it should increase to 3.7Mb/d in 2016 and 4.4 Mb/d in 2020 thanks to the revival of oil sector. The non-oil economy will also benefit from the lifting of sanctions. The production of non-oil sectors will take advantage from the increase of households and businesses’ confidence. However, the positive impact of sanctions’ removal could still be limited by the weakness of oil price that should constrain export revenues and postpone new investments in the sector. Following an observable slowdown in 2015, key sectors such as automotive and construction should experience a gradual recovery in 2016. In the medium term, structural rigidities including high inflation and a downward trend in capital productivity will continue to weigh on growth.

Public finances adversely affected by the low price of hydrocarbons

The Iranian authorities have gradually diversified their financing sources under the sanction. Also, the fall in hydrocarbon prices has had a less negative impact on public accounts than in other oil-producing countries. Nevertheless, the cumulative effects of the fall in activity in 2015 and in commodity prices have driven up the fiscal deficit. While the sluggishness of the oil market is likely to continue in 2016, the budget balance will probably improve. The expected recovery following the lifting of sanctions should increase non-oil revenues. Likewise, oil revenues will increase thanks to growth in export volumes. Investment could nevertheless weigh negatively on public finances. It is expected that the lifting of sanctions will enable the government to implement a set of infrastructure projects under the sixth five-year development plan. The Iranian debt remains low and is predominantly owed to state-owned banks. The government should also benefit from its assets frozen abroad.

Resilient external accounts

The current account should remain positive under the cumulative effect of the lifting of the restrictions and a fall in transaction costs for exports. Nevertheless, the positive repercussions of the lifting of sanctions could be limited. First, Iranian exports remain highly dependent on the hydrocarbon sector and industrial sectors dependent on oil production. Also, the low oil prices are likely to curb the growth in oil export revenues in spite of increasing volumes. Second, exports could be constrained by an appreciation of the exchange rate resulting from capital inflows. FDI should increase without necessarily returning to their pre-2012 levels.

The Iranian banking system suffered from structural weaknesses already before the tightening of the sanctions. The state-owned banks play an important role and remain under-capitalised. The exclusion of Iranian banks from SWIFT has increased this vulnerability by freezing Iranian banks’ assets abroad and by limiting foreign-currency deposits. The central bank, in agreement with the IMF’s recommendations, intends to recapitalise troubled banks and to overhaul the banking system in accordance with international prudential legislation.

Towards international opening

On January 16, 2016, after the Atomic International Agency approved the report on Iranian nuclear program, sanctions against Iran were lifted. Sanction removal was one of the main issue of the February (2016) elections which had to determine the members of the new parliament (Majlis) and the assembly of experts (clerical body that appoints the Supreme Leader). These elections have been a success for President Rohani’s supporters. The participation rate stood at 62% and the hard liners were mainly defeated. The new parliament is expected to favour reforms but mainly economic ones.

Furthermore, Iranian market wills stay difficult to access because of an unfavourable climate business that should limit foreign investment. Iran is still under other international sanctions regime (financing of terrorism and the violation of human rights).